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India's love affair with gold

April 08, 2013 12:52 IST

India does not regard gold merely as an investment, it is also the preferred form of hoarding tax-evaded wealth, writes Shreekant Sambrani.


I had recently recounted in this space stories of Arjun Biswal and Gemilla Tikku, tribal farmers from Araku valley in Andhra Pradesh.  They faced starvation before the Naandi Foundation supported coffee-growers’ co-operative changed their lives in the last decade.  Their first hesitant move into relative security was to make small purchases of gold.  This inspiring tale also validates an observation that great Indian economist for all seasons, Dr I G Patel, had made more than half a century ago, in 1958: “In prosperity as in the hour of need, the thoughts of most Indians turn to gold.”

But gold also causes massive worries, most notably to Indian finance ministers.  The current incumbent, Mr P Chidambaram, has his task cut out for him to contain the mounting current account deficit, the difference between foreign exchange receipts and remittances.  Its present level of about 5 per cent of the gross domestic product makes India live rather dangerously.  India imported 933 tons of the precious metal in 2011-12 (27 per cent of the global volume), up from 110 tons 20 years ago.

Imports of gold and silver have grown by 30 per cent in volume in the five years up to 2012.  They now rank in value second (albeit a distant one) only to petroleum and amount to about $ 50 billion annually.  That is a major contributor to the external trade deficit.  The latest Economic Survey observed that “the rise in imports of gold is one of the factors contributing to India's high trade deficit and current account deficit in 2011-12, forming 30 per cent of its trade deficit.” 

Some of his predecessors also had golden headaches.  Mr Yashwant Sinha faced the mortification of defaulting on external liabilities in 1990.  India physically moved 40 tons of its gold reserves to Bank of England vaults as collateral for the assistance it received.

The ramrod straight Mr Morarji Desai banned private ownership of pure gold bars and coins under the Gold Control Order in 1962, following India’s China war.  New jewellery could only be made with gold of less than 18 carat purity.  What little public appeal the poor Mr Desai possessed deserted him completely after this order, even as he became prime minister 15 years later.

Gold smuggling flourished and gave rise to such unlikely legends as Haji Mastaan.  The order itself remained in force for a further 15 years before its repeal in 1992.  We can now own gold and import it as well, after paying a customs duty which now stands at six per cent of the value. 

And it is not just modern-day Indians who display such attachment to the yellow metal.  The ancient Egyptians, Greeks, Romans, Aztecs, Incas, and the Ashanti Empire of West Africa all prized gold above all that they coveted and hoarded.  An obsession to convert baser materials into gold led to futile searches for the Philosopher’s Stone and spawned untold generations of alchemists.  The East India Company struck many a one-sided bargains for the cotton, spices and manufactured wares it took from India by offering newly-confiscated gold from the Americas.

Why are we so utterly fascinated by something that has little utilitarian value as a commodity?  Gold cannot be eaten or made into clothing to be worn (except as a freakish shirt someone recently made, weighing 3.5 kg at a cost of over Rs 10 crore!) nor is it any material of construction.  Yet it gets to everyone, without regard to gender, race, religion, nationality or economic status. 

International gold prices have steadily risen for a decade or longer.  They averaged $ 1,670 a troy ounce (31 grams) last year, which is the same as the prevailing Indian prices of around Rs 3,000 per gram.  This equalisation is a direct result of the removal of restrictions on imports.  Indian imports of gold, as well as the volume of international trade in gold have continued to grow even as its price has increased.  This would appear to fly in the face of accepted economic wisdom, which tells us to expect just the opposite. 

Gold represents stored value for future use.  Like currency notes stuffed in pillowcases (and quite unlike bank deposits or investments in shares), this value remains wholly idle until it is actually used.

That is what makes gold hoarding so problematic for economists and policy makers.  A significant part of the nation’s resources is kept away from generating future benefits.

But if the return on investments - the interest on bank deposits or dividend income - is less than the rate of inflation, such savings actually lose value over time.

That makes holding gold an attractive proposition in the reasonable expectation that it will at least not lose value and could even gain, if its price goes up.  If the perception is that the price rise in gold is not temporary, it is even more attractive to buy and hold it.  Gold is also the preferred form of hoarding tax-evaded wealth.

India does not regard gold merely as an investment.  We also attach some consumption value to it.  Our ownership of gold comprises in large measure of ornaments, which are prized in their own right.  Gold is thus a consumer good as well.  Parents also make phased gold purchase over time for use in children’s marriages even when prices are rising in the entirely reasonable expectation that later purchases may be even more expensive.  Therefore, rising prices do not necessarily dampen our enthusiasm for gold.  On the other hand, rising incomes actually spur us on to buy more gold.  Only imminent and utter destitution could lead to dishoarding of gold.  But even that is now countered by numerous offers of no-fuss loans against gold.

The Economic Survey says “to restrict the rising trend in gold imports which is adversely affecting India's balance of payments…[requires] bringing down inflation as well as expanding the range of investments investors have easy access to.”  But Dr Patel had anticipated this in 1950 (when he was only 25) when he said that “during the inflation and civil strife of recent years, the gold-holding classes proved wiser than the hoarders of local currency or investors in stocks and real assets.” 

We have moved a long way from the 1980s, when biscuits referred mainly to gold.  Amitabh Bachchan, who gained ever-lasting fame by his portrayal of a Haji Mastaan inspired character in Deewar, now flogs gold for a leading South Indian chain of jewellery shops.  But inflation persists, political and other uncertainties loom large on the horizon, and social trends are set by TV soaps flashing gaudy ornaments.  So despite an expected fall in international prices of gold and a slight slowing of its imports, nothing is as good to us as gold.  Arjun Biswal and Gemilla Tikku acted mostly as rational consumers.

Shreekant Sambrani